Relying on the Contracts (Rights of Third Parties) Act 1999 – Traps for the Unwary

Background

Many developers, contractors and sub-contractors will be familiar with the need to give collateral warranties to a seemingly endless stream of beneficiaries on even the most basic construction project.

Whilst many will appreciate the need for funders, purchasers and prospective tenants to protect their position by securing a contractual interest in a building, the burden of putting this “web” of warranties in place can be confusing, time consuming and expensive.

Providing it is not expressly excluded in a contract, the Contracts (Rights of Third Parties) Act 1999 (Act) allows a third party to enforce the terms of that contract (whether it be a building contract, professional appointment or sub-contract) and dispense with the need for collateral warranties.

With this in mind it is perhaps surprising that the construction industry has been slow to abandon collateral warranties and embrace the contractual protection the Act can provide.

That said, developers are increasingly taking advantage of the Act especially on projects based in and around London. Exploiting third party rights is likely to become even more widespread in the future but this should not be an excuse for accepting them unthinkingly.

The Risks

The Act contains a number of limitations which restrict a third party’s ability to recover its losses.

For example:

Section 3(2) of the Act allows a professional consultant or contractor to “set-off” against a third party’s claims if it is owed money by its employer.

Similarly, Section 3(4) allows a contractor to reduce a third party’s claim by relying on any defences against his employer available under the original construction contract.

Comment

If you are a funder, owner or tenant of a building, these limitations could severely limit the amount you could recover if the contractor makes a mistake, or the architect’s designs don’t perform as expected.

The risk posed by section 3(2) would nearly always be excluded under the terms of a collateral warranty agreement but you should not assume that your statutory third party rights will be protected in the same way.

Careful legal drafting and analysis will be needed to ensure that any statutory third party rights you receive give you the same level of protection that would normally be provided by a collateral warranty agreement.  As ever, you should seek specialist legal advice to ensure you are not caught out!

For further information, help or advice, please contact Adam Aston on 0191 211 7980.